PennyMac Mortgage Investment Trust Q2 FY2025 earnings call

• Synergistic partnership with PFSI provides competitive advantages: leverages PFSI's platform, allows efficient capital deployment, and access to origination market for unique investments. • Completed 3 Agency-eligible securitizations totaling $1.1 billion UPB and first jumbo loan securitization since 2013 ($339 million UPB) with retained investments. Been top 3 issuer of prime non-Agency MBS, completing 9 securitizations totaling $3.2 billion UPB with $300 million new retained investments targeting low to mid-teens ROE. • Expect to execute 1 Agency-eligible nonowner-occupied securitization per month and 1 jumbo per quarter. • ~2/3 of equity in seasoned MSRs (47% of deployed equity) and 16% in CRT investments, both stable with low delinquencies. • Significant equity allocated to organically created investments via PennyMac's production, providing insights into loan quality and performance, and enabling influence on credit outcomes. • In Q2, net income across strategies excluding market-driven changes was $36 million, down from $41 million prior quarter, driven by increased prepayment activity.

For the second quarter, PMT had a net loss to common shareholders of $3 million or $0.04 per share. Credit Sensitive Strategies contributed $22 million to pretax income, with gains from organically created CRT investments at $17 million (including $9 million realized gains and carry, $8 million market-driven value changes from credit spread tightening), CAS and STACR bonds generated $4 million gains, and investments in non-Agency subordinate MBS generated $1 million gain. Interest Rate Sensitive Strategies had a pretax loss of $5 million. MSR fair value increases were $23 million, offset by $45 million from MBS fair value changes, interest rate hedges, and tax benefits. Approximately 2/3 of shareholders' equity is in seasoned MSRs and GSE lender risk share transactions. MSR investments account for ~47% of deployed equity, down from 56% in 2022. CRT investments are 16% of equity, with low delinquencies. Correspondent loan acquisition volume was $30 billion in Q2, up 30% from prior quarter, with $3 billion acquired for PMT's account, retaining 17% of conventional Correspondent Production.

• Expect to continue 1 Agency-eligible nonowner-occupied securitization per month and 1 jumbo per quarter. • Current run rate return potential is $0.38 per share, up from $0.35 prior quarter, expected to increase further with increased investment activity in non-Agency subordinate and senior bonds, and positive momentum in correspondent and aggregation activities. • If yield curve steepens further, overall run rate would increase. • Expect leverage ratio divergence as continue retaining investments from securitization program, with debt to equity excluding nonrecourse debt at 5.6x at June 30 within historical range.

• Market volatility: interest rates were extremely volatile during the quarter, creating challenges for investment strategies. • Leverage related to securitizations: increase in nonrecourse debt from private label securitization activity, though repayment source is limited to cash flows from associated loans. • Credit and market risk: changes in credit spreads, interest rates, and loan performance could impact fair values and returns.

Q: Talk a little bit more about the non-Agency securitization opportunity, returns progression and risk positioning.

A: Non-Agency subordinate MBS had rate and spread volatility during the quarter. Credit spread tightened, but interest rate volatility led to slight fair value decline. Income excluding market-driven changes was in line with mid- to low-teens return expectations, and these investments are expected to remain stable with low credit performance shocks.

Q: Amount of retained interest on jumbo vs nonowner-occupied, how high up the stack and if it's opportunistic.

A: Retained a senior mezzanine tranche on jumbo securitization. Decision on retention proportion is deal-by-deal based on capital deployment. Likely to retain greater proportion of interests in future securitizations as capital is raised, with decisions based on available capital.

Q: Insights on possible GSE privatization and credit risk transfer future.

A: Not hearing much on GSE reform in D.C. GSEs active in credit risk transfer, but return to lender CRT not on horizon. Non-Agency securitization program creates comparable investments, revitalizing private label markets with active Agency-eligible, jumbo, and non-QM activity.

Q: Drivers of run rate ROE increase, especially on rate side.

A: Increase driven by additions in non-Agency senior in IO MBS retention from securitizations, higher ROE from Correspondent Production due to volumes, margins, and persistence of margin activity, and additional investments in non-Agency subordinate piece with positive returns.

Q: Sustainability of $0.40 dividend level, Board's comfortability.

A: Comfortable with $0.40 dividend level as run rate at $0.38 has potential to increase towards $0.40, taxable income moving towards supporting dividend, and additional investments in non-Agency securities bolstering taxable income.

Q: Update on book value in July to date.

A: Book value in July to date is very stable with respect to prior quarter end.

Q: Thoughts on title insurance reforms and low coupon borrowers mobilizing.

A: Title insurance reforms help on purchase side, but not expecting to accelerate prepayment speeds on low interest rate loans as closed-end seconds from low interest rate homeowners are increasing, but cost reduction is beneficial.